by Dewey E. Ray

Merger and acquisition categories explain a lot about the deal

Mar 17, 20153 mins
CIOMergers and Acquisitions

Understanding the merger and acquisition category helps CIOs plan for the transaction.

As a CIO I want to initiate M&A planning as soon as possible after learning that a deal is being contemplated. However, producing a detailed plan for IT due diligence and integration is often unrealistic (or impossible) during the early phases of the M&A process. So, under these circumstances what can a proactive CIO do to move forward with the planning process?

I have found that a helpful first step is to identify the “deal category” for the expected transaction. Identifying the category is generally straightforward because it is derived from the firm’s overall M&A strategy and is understood by the firm’s senior management. Once I have identified the deal category, I begin visualizing what the future state of the combined business will look like and, from a future state perspective, begin identifying the logical implications for IT. This approach then yields insight that can be used as the basis for creating a high-level due diligence and integration plan.To help you identify your M&A deal category here is a list of the most common ones, along with their labels:

Conglomerate–There are two types of conglomerate transactions: pure and mixed. Pure conglomerate transactions involve firms with nothing in common, while mixed conglomerate transactions involve firms that are looking for product or market extensions.

Consolidation–involves the conversion of one organization to the strategy, structure, processes and systems of the other, with the goal of improving financial strength, increasing negotiating power with customers and suppliers, and boosting capacity utilization.

Horizontal–allows firms that produce similar goods or services to leverage synergies related to excess capacity by improving operations and reducing costs.

Vertical–enables firms in which both contribute some of the raw materials contained in a final product to improve production processes, increase leverage with suppliers and distributors, and increase control over the supply chain.

Transformation–replaces both firms’ strategies, structures, processes, and systems with a new operating model that synthesizes the organizational, operational, cultural, and systems components into a new whole.

Combination–is similar to a Transformation in that it involves the synthesizing of disparate business components into a new whole in which the most effective structures, processes, and systems from each company are selected to form a more efficient operating model for the new entity.

Preservation–allows individual companies to share leadership, strategy, and financial assets while preserving the autonomy, operational independence, and value of the business units.

Congeneric or Concentric–allows individual companies to share leadership, strategy, and financial assets while preserving the autonomy, operational independence, and value of the business units.

Roll-Up/Bolt-On–is similar to a Vertical, but from a slightly different perspective, because it often involves multiple transactions as the acquiring company pursues its roll-up strategy.

Tuck-In–is similar to a Bolt-On except it involves the transfer of all of the acquired company’s resources into its own department.

If you didn’t see a category in the list that describes your particular deal, it’s possible that the deal is a “hybrid” composed of business drivers from more than one of the common categories. Deciphering the IT implications of a hybrid deal may be a bit more challenging initially, but focusing on the deal category(s) is a reliable starting point for IT due diligence and integration planning.

In my next post I’ll discuss the phases of a typical M&A transaction and the role of IT within each phase.